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On the global front, exit polls confirm the expectation that the Labour Party will win the UK election with a landslide. As of this morning, the Labour Party seems to be on track to get 410 out of 650 seats (with the Tories at a mere 131). As such, Prime Minister Rishi Sunak has conceded defeat. Turnout was close to a record low. Focus now shifts to the second round of the French elections this weekend. The latest polls suggest that the far right is unlikely to secure an outright majority. On the data front, the global release that made the biggest wave was the big miss on the US ISM services survey. Locally, both the Absa and S&P Global PMIs came in below the neutral 50-point mark in June. Worryingly, both PMIs point to weak demand with lingering political uncertainty weighing on orders.
On the cabinet, Sunday’s announcement brings much-needed certainty, although its too soon to tell how these ministers will perform. The cabinet is big, but this was perhaps to be expected given that many parties and people within parties had to be considered. On the one hand, it is encouraging that all GNU parties seem broadly in agreement with the national cabinet (or at least none have disagreed publically). On the other hand, a bloated cabinet can make the day-to-day workings of government more complicated. It will require consistent cooperation between GNU parties across and within ministries, which will not always be easy. Indeed, in Gauteng, ANC Premier Panyaza Lesufi announced a minority cabinet after negotiations with the DA failed. Without commenting on each individual appointment to the national executive, it is welcome that Minister Enoch Godongwana has remained as finance minister. Indeed, Godongwana has since said that fiscal consolidation will continue and that Treasury aims to have the debt-to-GDP ratio peak next year (in line with the Budget’s latest forecast). In addition, more clarity regarding the energy portfolio, with all the power in the hands of Electricity and Energy Minister Kgosientsho Ramokgopa, is also a positive.
In financial markets, the weaker-than-expected US ISM print and soft jobs data fuelled speculation that the US Federal Reserve may cut its policy rate in September (or at least later in 2024). This boosted bonds and commodities while contributing to a somewhat weaker dollar. As such, the rand exchange rate recovered from Tuesday’s losses on Wednesday and Thursday. The weaker dollar, in turn, led to a higher gold price. Meanwhile, Brent crude traded close to a 2-month high mid-week following data showing a sharp decline in US inventories and worries that hurricane Beryl could threaten production. It has edged somewhat lower since. Tension in the Middle East escalated with an Israeli airstrike killing a senior Hizbollah commander and Hizbollah firing more than 200 rockets towards Israel in return.
The BER inflation expectations survey for Q2 will be released later today. Next week, mining and manufacturing production data for May will give us a better sense of the impact of no load-shedding in Q2 on the domestic economy – at least from an output perspective. The high-frequency data for April (the first month of no load-shedding) was generally positive, with the manufacturing sector doing especially well. This was foreshadowed by a strong Absa PMI print for the same month. Unfortunately, the PMI slumped in May and remained lacklustre in June. It is highly unlikely then that we will see another big m-o-m jump in manufacturing output. Looking further ahead, depending on how long it continues, this week’s strike at Ford’s plant in Silverton could be a setback for factory output at the start of the third quarter. However, there was also some good news for the local manufacturing sector with Amsa announcing that its longs steel business – which had been under review for closure – will remain in production. The remark that there was some progress on Transnet’s operations is positive, and further improvements could have a real beneficial impact on the whole economy.
On the global front, today’s US nonfarm payrolls release is keenly awaited, especially after the softer activity and jobs data earlier this week (see international section for more). Next week’s US CPI (and PPI) prints will also play into interest rate expectations, as will the preliminary reading of the July Michigan consumer sentiment survey, which includes inflation expectations data. Beyond data and implications for monetary policy, the US news cycle will likely continue to focus on President Joe Biden and whether he should/will stand as the Democratic Party candidate in November’s US election and who could be his potential replacement.
The Absa PMI increased by 1.9 points to reach 45.7 points in June 2024, compared to 43.8 in May 2024. However, it was in contractionary territory for a second consecutive month. The second quarter started on a strong footing, with official manufacturing production data from Stats SA showing solid growth. Despite the stable electricity supply through Q2, insufficient demand seems to have weighed heavily on the sector’s performance in May and June. On a positive note, cost pressure is subsiding on the back of a relatively stronger currency towards the end of Q2, giving some relief as fuel prices decline. The index tracking expected business conditions in six months’ time came out very positive, with respondents likely hoping for diminished political certainty and (global and local) monetary policy easing. The S&P Global SA PMI dropped slightly to 49.2 points in June from 50.4 in May, signalling a deterioration in operating conditions in the private sector. On the bright side, the index showed that inflationary pressures fell to the lowest levels in four years and expectations about conditions going forward were, like the manufacturing print, positive.
According to naamsa, new vehicle sales declined sharply by 14% y-o-y in June, following another sharp decline of 14.2% in May. As reflected in the still negative FNB/BER Consumer Confidence Index in the week prior, SA consumers continue to grapple with a weak economic environment and high-cost pressures, which is reflected in the new vehicle sales. A possible interest rate cut by the SARB before the year's end will benefit the sector, and we expect that the downward trend in inflation can be maintained. The export market reported an increase of 3.6% y-o-y, selling 977 more new vehicles than June 2023. The European Central Bank (ECB) rate cut of 25bps could be beneficial for demand. Europe is SA’s biggest export market.
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The US Fed released the minutes from the June monetary policy meeting. The policy committee (FOMC) acknowledged that recent inflation prints have shown “modest further progress towards their 2% target.” Fed officials noted that a softer May CPI reading along with developments in the product and labour markets, supported their belief that price pressures were easing. In line with the committee’s objective of returning inflation to target, members agreed to keep the target range for the fed funds rate at 5.25% - 5.5%. Regarding guidance on the policy rate path, committee members emphasised patience and caution as they continue to assess incoming data and consider any adjustments to the fed funds rate. However, as in the May FOMC meeting, several members once again cited a willingness to raise rates if inflation were to increase or persist at an elevated level.
Still in the US, the services sector's resilience appears to be losing its footing. The ISM Services PMI significantly missed market expectations in June, sharply contracting to 48.8 from 53.8 in the prior month. June’s reading is the second time in three months that the index has slipped into contractionary territory. There was broad-based weakness across all subindices, but notably, there was lower business activity, slower new orders, and a faster pace of contraction in the employment index. However, a positive is that the index tracking prices paid declined from 58.1 to 56.3 in June (which is still high).
The ISM Manufacturing PMI fell to a below-consensus 48.5 in June from 48.7 in May. This marked a third consecutive month in contraction and the lowest reading since February. Little was changed in June, output once again declined, and demand conditions remained weak. Similar to the services sector, there was encouraging movement on the prices front. The price index fell to 52.1 from 57, easing to its lowest level since December 2023.
In China, the Caixin Manufacturing PMI rose to an above consensus 51.8 in June, up from 51.7 in the prior month. This marks the eighth consecutive month of improved manufacturing activity, driven by an expansion in output and fast-rising new orders. On the other hand, the Caixin Services PMI declined to 51.2 in June. This was below the consensus forecast and a step down from the 10-month high registered in the prior month. Although services sector activity expanded, new orders and export order growth eased. Meanwhile amid concerns of downward pressure on the Chinese economy, business optimism deteriorated to its lowest level since March 2020.
A preliminary estimate showed that, in line with market expectations, Eurozone (EZ) consumer inflation eased in June after a brief spike in May (2.5% y-o-y from 2.6%). Core inflation (which strips out food and energy prices) was unchanged at 2.9% y-o-y, as persistently strong services inflation partially offset the deceleration in energy and food prices.
Editor: Lisette IJssel de Schepper
Tel: +27 (21) 808 9777
Email: lisette@sun.ac.za
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Please refer to the glossary on the BER website for explanations of technical terms.
Friday, 05 Jul 2024
